Leslie’s, Inc. — Q3 Fiscal 2022 Form 10-Q
Business and period: The company sells pool and spa supplies and services through e-commerce and 979 company-operated locations in 39 states. The quarter was the 13 weeks ended July 2, 2022; year-to-date (“YTD”) covers 39 weeks. Comparisons are with the periods ended July 3, 2021.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | YTD FY2022 | YTD FY2021 |
|---|---|---|---|---|
| Sales | $673.6 million | $596.5 million | $1,086.5 million | $934.0 million |
| Sales growth | 12.9% | — | 16.3% | — |
| Comparable sales growth | 7.4% | 23.9% | 10.7% | 27.2% |
| Gross profit / margin | $303.6 million / 45.1% | $283.7 million / 47.6% | $456.6 million / 42.0% | $407.1 million / 43.6% |
| Operating income / margin | $172.1 million / 25.6% | $166.4 million / 27.9% | $155.7 million / 14.3% | $142.0 million / 15.2% |
| Net income | $123.0 million | $118.8 million | $101.1 million | $82.1 million |
| Diluted EPS | $0.67 | $0.61 | $0.54 | $0.43 |
| Adjusted EBITDA | $182.9 million | $179.3 million | $192.7 million | $188.6 million |
Cash flow and liquidity: YTD operating cash flow was $72.7 million, down from $118.0 million, primarily reflecting a $146.2 million inventory cash use as the company built inventory for the selling season. Investing used $66.2 million, including $40.7 million for acquisitions and $25.9 million in property and equipment purchases. Financing used $156.8 million, chiefly for $152.1 million of share repurchases and $6.1 million of debt repayment. Cash fell to $193.1 million from $343.5 million at fiscal year-end.
At July 2, 2022, term-loan principal was $799.9 million, with $781.3 million reported as long-term debt net of current maturities, discounts, and financing costs. The term loan matures in 2028; no revolving-credit borrowings were outstanding. The company reported $190.0 million of available revolver capacity after borrowing-base limits and $10.0 million of standby letters of credit. It reported covenant compliance and no financial covenants under the term loan or revolver.
Material changes and notable items
- Q3 sales rose 12.9%, but comparable-sales growth slowed to 7.4% from 23.9%. Acquisitions and newer locations contributed $32.5 million of Q3 sales; comparable sales contributed $44.6 million.
- Gross margin declined 250 basis points in Q3 and 160 basis points YTD. Management attributed the pressure to business mix, promotions, higher product costs, and distribution expenses, partly offset by occupancy leverage.
- YTD net income increased $19.0 million. Lower interest expense and the absence of the prior-year $9.2 million debt-extinguishment loss helped the comparison; YTD Adjusted EBITDA increased only $4.1 million.
- Three acquisitions added 18 locations for aggregate consideration of $40.7 million; preliminary goodwill recorded was $22.5 million. The company ended the period with 979 locations.
- The company repurchased 7.5 million shares for approximately $152.1 million in December 2021; $148.1 million remained under its $300 million, three-year authorization. No shares were repurchased during Q3.
Outlook, risks, and contingencies
The filing provides no specific sales, earnings, or margin guidance. Management said cash, operating cash flow, and revolver availability should be adequate for anticipated working capital, capital expenditures, acquisitions, repurchases, and debt service over the next 12 months, while noting that additional financing might be needed if those sources prove insufficient.
The business is highly seasonal: sales and earnings peak in Q3 and Q4. In fiscal 2021, those quarters generated 75% of sales and 97% of Adjusted EBITDA. Weather is a key external factor; unseasonably cool or rainy conditions can reduce demand. Other disclosed risks include supply disruptions, product-cost inflation, competition, economic and housing-market changes, execution of growth and technology initiatives, COVID-19 impacts, and cybersecurity threats. Management said COVID-19 restrictions had no material impact in the periods presented. Routine litigation reserves were not significant, and the company did not expect pending matters to have a material effect. Disclosure controls were assessed as effective.
Investor verification priorities
- Assess whether elevated inventory supports seasonal demand or creates working-capital, markdown, or obsolescence risk.
- Track gross-margin recovery and the effects of promotional activity, product costs, mix, and distribution expenses.
- Review operating cash generation against earnings, capital spending, acquisition outlays, and shareholder returns.
- Monitor leverage, floating-rate term-loan exposure, and available revolver capacity.
- Evaluate acquisition integration and the assumptions underlying preliminary goodwill and intangible-asset values.
- Compare future performance with the company’s pronounced seasonal pattern; this filing contains no quantified forward guidance.